The challenges of denouncing BITs: why it is better to renegotiate

Arbitral tribunals' expansive interpretation of key disciplines in international investment law in recent years has prompted a number of developing countries to implement strategies aimed at exiting the system. These range from denouncing the ICSID Convention and withdrawing consent to jurisdiction by other arbitral bodies, to denouncing the Bilateral Investment Treaties (BITs) to which they are parties. The purported objective of these initiatives is to reduce the legal exposure of these countries to international claims before arbitral tribunals, either by eliminating a forum for foreign investors' claims or by eliminating their rights under the treaties. Whether any of these strategies will be successful in meeting this goal is still hard to say, as both the ICSID Convention and BITs have “immune systems” – i.e., a set of built-in self-defense mechanisms – that render them somewhat resilient to change or termination.

The effects of denouncing the Convention are unclear when jurisdiction of ICSID tribunals is envisaged in other instruments, i.e., IIAs. The difficulty is that IIAs usually provide for a State's unilateral offer to arbitration, while the investor has not yet expressed his consent. There has been a significant amount of literature discussing this issue, in response to the decision of an important group of Latin American countries to denounce the ICSID Convention. Different opinions prevail to date. Some academics argue that investors can still bring claims against governments' measures. Others are convinced that this is not the case, since States may unilaterally withdraw their offer.

This is, however, not the only available “exit door” to the system. A more direct, unambiguous (and, so far, rarely discussed) way to shield States from international investment arbitration is to terminate existing BITs. This strategy is not without its own drawbacks. BITs may include fixed opportunities to denounce them, tacit renewal clauses that may make denunciation not possible until a number of years into the future and, more important, “survival clauses” that extend the effects of the BIT for existing investments for a period of up to 15 years after they are denounced. As a result, the effects of unilateral termination of BITs may be postponed.

Against this background, we are of the opinion that developing States seeking to reduce their exposure to international investment arbitration, are better off by renegotiating their BITs instead. Renegotiation does not require the termination of the treaty, it may be implemented at any time and does not trigger the application of “survival clauses”, thus making changes to the BIT immediately applicable. In order to be successful, this strategy requires tackling both legal and political challenges. First, it requires that Most-Favoured-Nation clauses be redesigned, as their traditional drafting would have a neutralizing effect on BIT amendments (since it would take a long time for the State to renegotiate or withdraw from all other more “protective” BITs). Second, it requires the willingness to renegotiate by the other State who is party to the respective BIT. Third, the question remains as to whether investors that have made their investments prior to the amendment may have a claim under the disciplines of the original version of the treaty.

Still, if implemented successfully, this strategy would more effectively achieve the goals of developing States while at the same time being more considerate of treaty partners' interests. The most rational way for countries seeking to exit the system seems to be, ironically, to stay in it.

This discussion note is based on Federico M. Lavopa, Lucas E. Barreiros and Victoria Bruno, "How to Kill a BIT and Not Die Trying: Legal and Political Challenges of Denouncing or Renegotiating Bilateral Investment Treaties", available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2102683.

See also IPFSD clauses:

4.2 Most-favoured nation (MFN) treatment

12. Final provisions

UNCTAD IIA Issues Note: "Denunciation of the ICSID Convention and BITs: Impact on Investor-State Claims".

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The authors’ suggestion for States to renegotiate rather than to unilaterally terminate their investment treaties is indeed a promising one. Not in the least because renegotiation preserves and improves the rule-based system of international investment law whereas denunciation may result in a legal void. In designing better investment treaties that balance investment protection and policy space with a view to promote sustainable development, these States can find guidance in UNCTAD’s IPFSD.

Importantly, however, even if renegotiation is the preferred option to address current concerns, unilateral denunciation still has a role to play. As the authors rightly emphasize, renegotiation requires agreement between both contracting State parties to an IIA. This may give rise to what is known in game theory as a “hold-up” problem: the other party can block any treaty changes to extract more concessions on the State asking for amendment. In seeking renegotiation, developing countries may thus face unfavorable bargaining dynamics. This is where unilateral termination comes in. Denunciation offers an escape route. The denouncing State is paying its way out of the treaty. The price tag for denunciation is the survival clause. Depending on the length of such clause, it is more or less costly to escape. Where escape is “cheap” with short survival clauses, States can use the threat of denunciation strategically to remedy the hold-up problem. A credible threat of withdrawal will thus improve the bargaining position of the country that seeks to either reform or exit the system and set a valuable precedent for future negotiations. In sum, States should not discard denunciation (or threat thereof) altogether, but should use it strategically to negotiate better treaty rules ultimately benefiting both investors and states by fostering sustainable development.

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The authors and commentator note that "exit" is a tool governments can use in order to try to minimize their liability under IIAs, and that threats of or efforts to "exit" can also be strategic ways to manifest discontent with their treaties and/or how those treaties are being interpreted. But, as Professor Anthea Roberts has highlighted, governments can also try to accomplish these two goals -- narrowing liability and manifesting discontent -- by employing the complementary or supplementary tool of "voice".

More specifically, for their existing treaties, states can take a number of steps to demonstrate their views of the meaning of their treaty obligations in ways that may help shape outcomes of future (or potentially pending) investor-state disputes. A state can, for instance, (1) issue joint or unilateral statements to clarify (and narrow) its intent regarding its treaties' provisions; (2) make submissions in investor-state disputes involving its treaties (whether or not it is actually a party to the dispute); and (3) issue statements to respond to tribunals' decisions in particular investment-treaty disputes. In each of these cases, the state can publicize its views by, for example, posting its statements on the website where it lists the investment treaties to which it is party.

Taking such steps to clarify treaty obligations, participate in investor-state disputes, and respond to tribunals' decisions can help provide evidence of state practice and agreement which, in turn, is relevant to treaty interpretation under international law. Some countries (e,g, the United States and Canada) do therefore systematically devote the time and personnel necessary to track and shape interpretation of their treaties through these mechanisms. But, likely due to the resources required for such efforts, many states have thus far been only minimally active in exercising their "voice" in these ways. Some factors that can make it easier for states to exercise their voice include greater transparency facilitating increased access to tribunal decisions; the availability of free reporting sources such as the Investment Treaty News and International Arbitration Case Law project; and online and in-person networks and mechanisms for sharing experiences, knowledge and practices regarding interpretive statements and non-disputing party submissions (e.g., IPFSD and IISD Forums). These tools and resources can help promote use of voice alongside or instead of exit, and may provide a less politically costly option for states concerned about potential liability under their existing treaties.

Very good point! States that exercise "voice" through the less formalized tool of interpretation can also avoid the high transaction costs associated with more formalized tools such as re-negotiation that may require domestic ratification.

A very helpful UNCTAD publication to guide States in interpreting investment treaties is an IIA Issue Note from last year: "Interpretation of IIAs: What States can do". Based on the VCLT, it lists a number of interpretive tools that States have at their disposal to foster a more coherent and predictable reading of international investment agreements.

It can be access here: unctad.org/en/Docs/webdiaeia2011d10_en.pdf

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No doubt that the topic addressed in this discussion is of urgent importance especially for those states already stuck in investment arbitrations or facing probable or potential such threat. China might be deemed as one of the latter cases, and might provide an inspiring case study of: 1) how developing country could, through determined negotiation (& possible future re-negotiation), achieve to conclude a moderate BIT with other countries; and 2) which issues should be carefully considered for possible future re-negotiations.

China’s BIT contracting practices have seen “three generations” during past decades. The year 1998 marks a watershed, before which China had been holding a rather conservative stance towards its BITs. Since the 1998 Sino-Barbados BIT, China had adopted a more liberal strategy in contracting such bilateral treaties, allegedly due to its shift to “double identities” in terms of capital import/export. This change of strategy had encountered much criticism from its domestic academic circles, for it had transferred out much of sovereign rights, and might lead China into a disadvantageous status in possible future waves of claims, as what have actually happened in Argentine. And afterwards, through 22 rounds of formal negotiations and several rounds of informal consultations during the past 18 years, the hard-earned 2012 Sino-Canada BIT represents the newest and Third Generation of China’s BITs. It is particularly notable that the 2012 Sino-Canada BIT contains, inter alia, a key feature of clearly eliminating the possibility of MFN clause extending to procedural rules. These recent developments have been well analyzed in Prof. An CHEN’s article entitled Should “the Perspective of South-North Contradictions” Be Abandoned? – Focusing on 2012 Sino-Canada BIT (forthcoming in the April Issue, i.e. Volume 14 (2013) No.2, of The Journal of World Investment & Trade, Geneva).

The vast majority of one hundred-odd Sino-Foreign BITs was concluded during 1982 – 1997 and may be categorized as the First Generation, while concluded during 1998 – 2011 as the Second Generation. However, for “keeping pace with the time”(与时俱进), all their related MFN clauses and the scope of application (e.g. the applicability for investors from Hong Kong as in the case Tza Yap Shum v. Peru) are, among others, two key issues to be re-considered and clarified, if they were to be re-negotiated.

(By Professor An CHEN and Ph.D Candidate Mr. Fan YANG, Xiamen University, China, March 20, 2013.)

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